Should I contribute to my agency's 401k plan?

Many agencies offer a retirement plan, such as a 401k, to their travelers. Investing in these programs can be a great step towards your financial independence.

After you have a healthy emergency fund in the bank, you may want to start stashing some funds away in a 401k. Regardless of whether you stay with one agency for years or switch between groups to find the best contract, investing in the company's retirement plan is usually a very good idea. Beyond saving for your future, a 401k plan can help lower your tax liability and even score you 'free money' through your agency's match.

Set it and forget it

Setting up your 401k contributions is an easy way to put your savings on autopilot. Not seeing the money in your weekly paycheck means you will never really miss it. By setting your contribution percentage early in the contract, you can establish your budget without noticing your contribution has slightly reduced your paycheck. Honestly, the amount transferred from your paycheck to be contributed to your retirement account is often negligible because of the reduction in taxes offsets the difference.

'Free money' through company matching

If you decide to stay with an agency long enough to be vested, make sure to take advantage of the company match. This is 'free money' that you can only access if you contribute to your retirement plan. Even if it's only a 4 or 5% match, it is well worth your effort to make the contribution to receive the extra cash. The agency takes this into consideration when calculating your pay package, so be sure you collect it if eligible. A small consistent contribution over time will eventually grow to be a sizable amount.

Reduce your tax-burden

The amount of money you contribute to your 401k plan is not subjected to regular income taxes. By contributing to your retirement, you can effectively reduce the amount of money you owe to the government. If you are in the 22% tax bracket, you will save roughly 22 cents in taxes for every dollar you contribute to your plan*. This small amount of savings adds up significantly over time.

Reduce your Adjusted Gross Income (AGI)

If you are an aggressive saver working towards FIRE (Financial Independence Retire Early), you'll probably want to max out your retirement accounts to the best of your ability. Once your gross income exceeds $129,000/year, you can no longer contribute towards your Roth IRA.

However, by contributing to your 401k, you can adjust your gross income, thus making you eligible to contribute to your Roth IRA again without any penalties. For example, if your taxable rate is $75/hr and you work 40 hrs/week for 11 months out of the year, your gross income would be $144,000.

This gross income renders you ineligible to make Roth IRA contributions. However, If you max out your 401k at $20,500 for the year, this will adjust your gross income to $123,500 ($144,000-$20,500 = $123,500) Thus dropping your AGI below the threshold for Roth IRA contributions, and allowing you to contribute to your Roth IRA again (if filing single).

Consolidate old retirement plans

When you leave one agency and move to the next, you have a couple different options regarding what you can do with your 401k plan. If the plan has low maintenance costs, you may choose to keep it where it is. However, if the management fees are substantial, it may be wise to transfer it to an IRA.

Once you are no longer employed by that agency, you can move your old 401k funds into a roll-over IRA. This is a pretty simple process and many companies like Fidelity, Schwab and Vanguard offer low or no-cost accounts with many attractive funds to invest in.

Save for retirement

Aside from reducing your tax-burden and adjusting your AGI, the primary reason to contribute early and often is for your future. Working in the medical field is hard work and none of us want to need to work through our retirement years. By starting your retirement savings today, you can assure you'll be financially secure later in life. If you enjoyed this article and wish to receive our latests post in your inbox, you can subscribe using the form below, also be sure to follow us on Facebook.

*This example doesn't take the progressive tax system into account in order to simplify the general concept.

**We are not financial planners or tax-strategists. Be sure to contact your financial advisor and tax professional regarding any financial planning.